Wednesday, December 12, 2012

Iceland holds rate steady, changes depend on wage rises

The Central Bank of Iceland kept its benchmark seven-day collateralised lending rate steady at 6.0 percent, as expected, and said future interest rate changes would depend on the outcome of wage negotiations.
The central bank, which has raised rates five times this year, said economic developments had been in line with its November forecast, the exchange rate was stable and inflation as expected.
Iceland's inflation rate rose to 4.5 percent in November from 4.2 percent the previous month and the central bank said preliminary data showed that economic output had expanded by 2.0 percent in the first three quarters of the year, slightly below the bank's 2.1 percent forecast.
The bank's interest rises since August and the fall in inflation had withdrawn "a considerable amount" of the accommodative monetary stance and the degree to which further normalisation of the stance happens will "depend on future inflation developments, which in turn will depend to a large extent on exchange rate movements and wage-setting decisions," the bank said in a statement.
"Whether the Bank's nominal interest rates remain unchanged in the near term will depend, among other things, on whether the outcome of the forthcoming wage settlement review at the beginning of next year is consistent with inflation declining to the target," the bank added.
Iceland's central bank targets inflation of 2.5 percent. The central bank has raised its benchmark rate by 125 basis points this year and inflation has been coming down from over 6 percent in the first half.
The central bank had been expected to keep rates unchanged after the governor last week said the bank was likely to keep interest rates steady in the short term but warned they could rise further if wage increases exceed the inflation target.

Iceland's Gross Domestic Product rose 3.5 percent in the third quarter from the second for annual growth rate of 2.1 percent, up from 0.5 percent. The unemployment rate rose to 5.2 percent in October from September's 4.9 percent.

The central bank has forecast 2012 growth of 2.5 percent, in line with 2011's revised growth of 2.6 percent.